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It's highly recommended for buyers to take the time to get pre-approved for a mortgage before starting their search for a new home.
A pre-approval letter will help buyers determine how much they can afford and the types of properties that fall within their budget. It can also help buyers gain a competitive edge, especially in a fierce seller's market.
As a buyer, it's important to understand that even though you may be pre-approved for a mortgage at a certain amount, this letter does not guarantee a final mortgage approval.
Anything can happen between the time that the pre-approval letter is issued and the actual closing date that can prompt the lender to deny your mortgage.
So, what could possibly happen that would cause you to be denied a mortgage, despite having been granted a pre-approval? Here are a few things to keep in mind...
1. The Appraisal Came in Low
A common reason for a mortgage to be denied is because of a low appraisal. Lenders typically require that a home being purchased is appraised in order to verify that it is worth as much as the buyer agreed to pay for it.
After all, the lender is providing a large chunk of money to assist with the purchase, so they'll want to make sure that the asset is as valuable relative to the loan being given.
READ: 6 Helpful Tips For Selling a Unique Home Or Property
As such, lenders will require that an appraisal is done. But if the home's value is appraised at a price lower than the agreed-upon purchase price, the lender will likely refuse to provide a mortgage.
If this happens to you, your only recourse would be to either go back to the seller and negotiate a lower price to match the appraised value or increase your down payment amount to bridge the gap between what the home is worth versus how much the lender is willing to give you.
2. You Applied For Another Loan Or Credit Account
There are a few important factors that your lender will look at when assessing your borrowing power. Your debt-to-income ratio is one of them. This ratio represents the amount of debt that you have on the books and how much of your income is dedicated to covering the payments.
READ: 7 Things You Need To Know About Home Equity Lines Of Credit
If you take out additional loans, you're adding to your debt load. And, if your income remains the same, your debt-to-income ratio will increase, which is not ideal.
It’s important to refrain from applying for any new loans when you're trying to get approved for a mortgage. This can cause your mortgage application to be denied.
3. You Changed Jobs
Your lender will want to know what you do for a living, what your job status is, how much money you make, and who you work for. If any of this information changes while the lender is still working out all the details of final mortgage approval, it could throw a wrench in the process.
While you may have taken another job that pays more, it could still influence your length of consistent employment and cause gaps in your job history.
READ: 6 Canadian Cities Make Best Cities In The World For Finding A Job List
While many lenders might be OK with a job change as long as it's in the same field, completely changing your job status and industry could complicate things. And, if you completely forego a salaried job and become self-employed, you can really mess things up with final mortgage approval.
4. The Loan Criteria Changed
Sometimes it's nothing that you've done that can cause your mortgage application to be denied. In some cases, the lender's guidelines change, which can, in turn, change things for your mortgage approval.
READ: What You Need To Know About The Mortgage Stress Test In 2019
It's possible that the lender might have changed their requirements and guidelines, such as increasing the minimum credit score needed for mortgage approval, even after a pre-approval was issued. This can be a reason for your mortgage to be denied.
5. Your Credit Score Took a Hit
Your credit score is one of the most important factors that determine your ability to get approved for a mortgage. Generally speaking, a minimum score of anywhere between 650 to 680 is needed to get a conventional mortgage, though different lenders might have their own specific requirements.
Many things can influence your credit score, for the better or for the worse. If your credit score took a hit during the mortgage approval process, that could be a reason for your application to be denied.
READ: 5 Ways To Improve Your Credit Score In 2019
Whether your score took a tumble because you missed a couple of bill payments, applied for a new loan, or have been maxing out your credit card month after month, any one of these things could cause your score to dip and therefore lead to a denied mortgage application.
While getting pre-approved for a mortgage is always a good step, it's still important to be diligent about your financial situation to make sure the process goes smoothly. Things such as those mentioned above can cause the mortgage approval process to be thrown off its original path, which can put your ability to secure a loan at risk.
